Episode 20: Kevin Mosley of Jurassic Capital
on How to Use SaaS Benchmarks to Build a Better Business

Episode Transcript

Shiv: Alright Kevin, welcome to the show, how's it going?

Kevin: Hey Shiv, great. Good to see you, man. Happy to be here. Thanks for having me.

Shiv: Yeah, excited to have you on and just for the audience, why don't we start with your background in Jurassic capital and we'll go from there.

Kevin: Yeah, absolutely. So I'm one of the co-founders and general partners of Jurassic Capital. We are a Durham North Carolina based early growth equity firm for B2B software companies who are going through the transition of the kind of individual founder led heroics and are looking to make the transition into a true growing and scaling SaaS organization. We're former SaaS operators. We started a company called Bronto, hence Jurassic, right? We love dinosaurs.

And so we have been doing this now for about four and a half years, really trying to help companies be incredibly active with large minority or even light majority stakes for companies who have been pretty efficient but haven't gone the straight and narrow VC path, but also are a little bit too small for traditional growth equity. We've been having a blast. We focus on Southeast United States companies. So kind of from DC down to Florida, over to, but not quite including, Texas. Really, where we've seen this gap. And so have five portfolio companies now and looking for a few more. We've got a $30 million fund, and writing about $2 to $3 million checks.

Shiv: And so 30 million is obviously on the lower end of what VC and PE firms have as their assets under management, but it allows you to kind of focus on the subset of companies that are sub 10 million. So what is the ideal sweet spot? What sizes of companies do you ideally like to find and what characteristics do they share?

Kevin: Yeah, sure. So we tend to look at companies once we feel like they have found pretty good product market fit. We all know that product market fit is a bit of a BS term as well. And everybody's got a slightly different definition to that. But for us, that means, hey, you are solving a real gap for real customers. You've gone through enough renewal cycles where you feel comfortable with that. But you've done so in a pretty capital efficient manner. Either you've gone out and gotten some friends and family money. Maybe you took some angel money a number of years ago. But you're now looking to take that and start to expand that. Maybe - oftentimes, all of your sales has come in through referrals or inbound. Now it's time to go do some outbound, go to market, as well as create engines internally, right? All across the board where you're starting to create predictable and repeatable models for things. That would be everything from go to market to R&D to customer success where you're making the transition from support to account management and professional services.

It's kind of all of the above as well as adding in the back office for the first time. We're trying to help institutionalize and make those the kind of perfect looking - you hear about rule of 40, rule of 40, 10 million dollar ARR companies. That's what we're trying to build. And so we're looking for companies that are kind of right in the middle of that transition. So in that kind of one to five million dollar journey that are still, again, pretty efficient. They don't have to be profitable, but they need to be, you know, showing good metrics and good things for the future that mean, hey, we can go put some capital on. We're not going to go write 10, $15 million check, but we can go write a $3 million check, put it on the balance sheet and let it go to work over the next couple of years.

Shiv: Right, and it is an interesting stage, right? Because when you're that small, you don't have the attention of the larger private equity funds. So do you find a lot of competition when you're looking at these companies?

Kevin: Honestly, no, that's been one of the interesting surprises that we got into in 2019. We thought there was going to be maybe not very many of these companies. And it turns out - remember, very few companies actually get venture backed. It maybe seems like everybody does, but that's just the ones that you hear about. And so the reality is there's so many different paths to go down to eventually get to your end result. And what we found is that so many of those will go down a different path and we tend to be a great fit for those. So in fact, we get most of our referrals from other venture capital firms that will say, hey, this is not a fit for us, but it's too small for traditional growth equity. So we'll get the other half from referrals from the PE and growth equity folks saying, hey, this is just too small for what we do. We tend to write the right size checks at that range that are unique to companies of that size. It feels like most - most other people that play at that space want to be writing much bigger checks or much smaller checks.

Shiv: Right, right. Bigger checks is you usually always the goal because you can kind of get more capital deployed at the same time. So that makes total sense. And one of the reasons I wanted to have you on is given this focus on the size of company and trying to get them to the $10 million mark, you guys have done a ton of work in looking at some of those key fundamental metrics that these companies need to focus on and drive in order to build a more sustainable business that can actually be investible and actually find more institutional partners for. So I wanted to jump into your benchmarking report, and just to set the stage for our audience, just give us some background into the work that went into this and what the thinking was and what you were hoping to get out of it.

Kevin: Yeah, I'm so excited to share this. We released this back in, I think it was just the beginning of Q4 of 2023, and we'll continue to update this annually. This was actually a bit of a passion project of mine that I didn't realize so many other people nerded out on until we actually got it out into the world. And it turns out lots of people nerd out on this, and they appreciated the work that went into it. You mentioned that we kind of hang out in this unique situation and this unique phase of the market where we're really talking about the one to $10 million journey. We're not talking about the zero to one. We're not talking about the 10 to a hundred or beyond all of which we've done in our operating days. We appreciate those, but that's not what the market was asking for from us. The market was asking for the one to $10 million journey. And that's what we focus on. And so when we get involved with our companies, we tend to focus on, Hey, what's specifically going to get you to 10? Because we found that things really change at each side at each phase along the way. As a CEO, you're going to have to reinvent yourself at least those three times, if not more as time goes on. So the things that make you a great zero to one company are not going to be the same things that make you a great one to 10, and so on and so forth, right, a great 10 to 100, and so on. So one of the things that really bugged us - and this goes back to our operating days. I've been tracking SaaS benchmarks back to my FP&A days at Bronto and beyond for well over a decade prior to this. So this is something that I just kind of personally kept updated. If I ever had an intern over the summer, I could have them go and check out the various B2B SaaS benchmark reports that were out there in the world and just kept updating a spreadsheet, just a Google Doc that truly has been the case since probably about 2012, maybe 2013. And watch as numbers changed. We used that to help judge ourselves internally, but more importantly, used that to start tracking the right set of metrics, define what we felt like was a kind of single source of truth, and then start judging ourselves and trying to beat those targets or become a really truly best in class type of company. 

That project, again, just - we started keeping this over time. I called it the B2B SaaS Benchmarks Bible. I started passing that along to our portfolio company CEOs over the last couple of years. But they always say, hey, this is a little overwhelming. What actually matters out of this? And so we realized that, yeah, we don't need to be tracking public companies like we were. We don't need to be tracking all the reports when they're talking about $100 million plus company. We don't need to be tracking companies where it's the, oh, you're 500k in ARR and you need to get to a million. That's not the journey that our companies are going through. But most of the reports out there do a pretty decent job of separating it by size of - size of company, size of contract, all of that type of thing. And so we recognize that it would be very helpful to update, as we do kind of on an annual basis, all the various reports that come out there and distil it down to what actually matters for our subset of the market, which is the one to $10 million journey. So we kind of took all the noise out. I don't really care what the $100 million plus companies are doing. I don't care what the $50 million companies are doing. Let's go just focus on the one to $10 million companies.

And so we put together a report, we kind of prettied it up, we made it nice and we put it out into the world. Like I said, kind of back after everybody released their reports over the summer and kind of into the fall. And it turns out that other people had been asking for the same thing and also complaining about the noise that was out there. And this was very helpful because it also came with a bit of an opinion from us as well as to, hey, how relevant is that piece of data versus this piece of data?

Shiv: Right. And I think that's the part that's great about it. It's that it's super relevant to companies at that stage. And I want to maybe start off with the first piece that you mentioned is looking for companies that already have product market fit. And one of the key metrics to figure that out is actually retention. Right. So talk about the benchmarks around net retention and gross revenue retention that you found as good benchmarks and for founders as to look at their own businesses and say, this is the target that we should be striving for when we look at our own retention metrics.

Kevin: Yeah, you know, it's really turned into almost the definition of product market fit is net revenue retention and gross revenue retention. Gross retention, of course, being what are you losing of what you have around? So really just taking into effect downsold and churned ARR net, then taking that same number and getting to add upsell back into it. So you might be able to get back to 100% of what came up for renewal gross. Obviously, you're not going to be able to get above 100%.

What we found and what we looked at here was that gross retention is pretty much always, no matter what size you are, it's going to be in the 85 to 92 percent range. That's been the case as long as we've been tracking it. That number just doesn't move around. And so if you're sitting below 85 percent gross revenue retention, you've got to ask yourself some really hard questions right now. Why are you not? A lot of times what we find is that in companies that are selling to SMB, on the - at least on the kind of lower ACV side, it's going to be lower. In fact, this last year we saw that number be 81% if you're selling less than 5k ACV deals. That's really hard, partly because it usually means it's kind of easy on, easy off. There's probably a pretty high competitive atmosphere going on and it's very easy for somebody to move off of you and look for the best price or whatever that may be. And it's usually not a massively mission critical piece of software.

Obviously, the higher that you go, this follows logic, the higher your gross retention should be. If you're over, you know, if you're between 50 and 100 K of ACV, you know, we're talking about 91% is probably a more realistic gross revenue retention. Otherwise, though, 85% tends to be kind of the magic number that you need to be above. If you're below that, usually what it means is there's some product problems. It's probably not customer success related. It may be more around the idea of, hey, your product may not be that easy to use. You may have released a lot of new features. You're probably good at selling new products, but if you - and talking about those new products and kind of getting people distracted by the shiny objects that are out there, but you may not be actually great at delivering them and providing an experience that people love to see, that is a, as of right now, at least from a gross retention perspective, that is a must to be at kind of 85% plus if you want to go get invested in right now.

Shiv: Right. And if a company is below that number - I have a couple of follow ups, so let's start with this one - if the company's below that number. What are some of the recommendations that you're making to those kinds of companies to pull those numbers up above the 85% mark or even above 90% so that they're in a healthier territory?

Kevin: Yeah, absolutely. One of the biggest ones of those is, take a look at your roadmap. If your roadmap is completely made up of new products and new features, you're probably missing something. We have recommended to all of our portfolio companies that have kind of run into situations like this, you now need to have a new section of your roadmap which is called retention. What are you hearing most often from your current customers? Not just - even if you're good at listening to customers, potential customers on the outside, right, new customers, what are they asking for. That may not actually be what they need. You need to be listening to your current customers also and what are they complaining about? What are they really interested in? It does all go back to listen to your customer, listen to the market. You may think that you have all the answers. I promise you, you don't. And if you haven't changed the way that you're thinking about this in the last 18 to 24 months, you definitely don't know your customers anymore because your market as everyone's market has shifted.

And so a lot of it is going back and thinking about your product and are you actually solving the problem that's out there? There are lots of other kind of smaller tweaks, I would say. Most companies that I see that are below 85%, it tends to be more about the product side. But let's say that, hey, maybe it's more on the account management side. Oftentimes this kind of gets into what I called out earlier, the engine of customer success. It shifts pretty drastically the bigger that you get.

We find that it tends to happen somewhere in the, call it two to $7 million range of ARR, where you start to make this shift from, when people contact you, they deal with one hybrid customer success, support, account manager, superhuman person, right, that is doing all of the work and is responsible for the entire relationship. Those people oftentimes are more concerned about just making sure that they can survive and get you to the next day and get you to your next complaint than they are with making sure that you can actually renew. That is a different type of brain. It's a different type of person that is comfortable with making the ask of, I know you said you're happy right now, but does that mean you're actually going to renew tomorrow when your contract comes up? That's a different thing. So possibly if you've got the room in your budget, finding a real account manager to come in can be oftentimes game changing and get you a couple of percentage points back just from some very normal kind of low-hanging fruit best practices that they can bring along.

Shiv:Yeah, well, that's a great point. I think the point on the customer side is also a really big one. I think companies try to grow up too fast without necessarily giving the customers that got them to where they are more attention and more care in terms of how the product is actually servicing their needs. And I think customer success and onboarding even is a really big part of that because somebody might use the platform, but how are you making sure that they're actually successful with the platform so that they're gonna continue wanting to use it and looking at things like usage rates and NPS scores and all of that goes into feeding some of that as well. So I think that's a great point. How much are you focusing on that aspect, just to touch on that since it's come up, is on the onboarding? On how frequently a customer is using the platform and their overall NPS scores as a input into gross revenue retention numbers.

Kevin: Absolutely. I was - when I was saying some of the kind of low-hanging fruit in terms of account management techniques that somebody could bring in, those are probably the top, you know, three or four items that someone would come in and do. The very first thing they're going to do is go look at usage. Do you have something that can track that? Do you have a - you know, they talk about full story - every CRM, every software kind of major software out there now has some type of integration to something that can go do that. Make sure you're building that in, right? When you're going and building the product, make sure you've got some type of reporting. The big thing that has changed today is you've got to be able to show ROI. So if you don't have usage stats, how are you going to possibly be able to go back and be able to show ROI on what you originally had? So in that way, that's how people are having account management conversations because I've heard somebody say, you know, if you are in a great economy, you're fighting against all the other competition. In a kind of tougher economy, which is one of the ones that we're in right now, you're fighting against doing nothing and you're fighting against somebody taking away that budget. So you have to justify your existence every single day. So how are you doing that? The easiest way to do that is via usage stats and making sure that the people who are buying it are actually getting what they want out of it. And to that end, as you talk about onboarding, we love the first time to X metric, the first time to a - if you're.

selling email marketing, the first time to a send. If you're selling, you know, HR software, the first time that you do a review or the first time that you do something, that should be a stat that is being tracked. And that should be a goal of, hey, it's 90 days. Now it needs to be, you know, 65 days. We want to see that start to go up or start to go down. And that gets people using it faster.

Shiv: Right, that's awesome. There are definitely founders listening that have companies with those SMB deal sizes that you had mentioned earlier on. And I did want to touch on this piece as well is, some softwares are easy on, easy off, but it's one of those things where people need to kick tires at a bunch of different tools before they pick one. And so like -  project management software is like this or e-commerce software is like that where it may take you a while to pick something. And so there's going to be free trials and churn that goes behind that very quickly. But at the same time, once you pick something and it's embedded into your infrastructure and your way of operating, now it's there for an extended period of time. So how do you account for that on the gross retention side? Because especially when the deal sizes are smaller, you may have lower gross retention numbers, but the volume of customers is a lot larger than a business that maybe has lower volume but higher retention numbers.

Kevin: Yeah, I think it's all on how you look at it. I tend to, in terms of the, call it the freemium model, right, of the free trial model, I almost prefer to look at that on the sales and on the CAC side, like the cost to acquire a customer, then on the retention side, partly for that reason of it tends to make it difficult to be apples to apples when you're trying to benchmark yourself against everybody else, you're going to have a really low gross retention rate. If you're talking about a freemium model where it's you know, you haven't even converted somebody into a paying customer or converted somebody into a larger paying customer. Yeah, if you just - if you are in that kind of industry or, you know, just reset yourself to a level of ‘we know gross retention is going to be very low and we're kind of insisting on that’. I like using that in terms of the cost to acquire a customer almost on the sales and marketing side of hey, whatever the whatever if you're getting money for a paid trial before they go off or if it's some type of freemium, take that into account in terms of the cost to eventually go acquire a paying customer so that you can track that efficiency.

Shiv: That's a great point. So maybe we shift gears to that and we'll come back to net retention in a second. So if you're judging it from that acquisition standpoint, then yeah, business like that is easier to judge because now the top of funnel metrics don't matter as much because there might be a bunch of customers that churn in month one of a $25 plan, but looking at what it costs you overall to bring in all your revenue and looking at the blended CAC and what are the benchmarks there that you look at?

Kevin: Yeah, the gold standard one obviously is LTV to CAC, which has a million different definitions. And so we picked the one that we like the most. Which we can do! And the one that we saw most consistently getting judged. The reason we picked that one is that there's a gold standard that's 3X, right? What are your - LTV divided by your CAC should be, roughly speaking, 3X. That has always been the gold standard. And during the pandemic time, it was closer to 4X. These days, it's closer to like two. So it's just a number that everybody kind of can agree on. And if you see a number that looks like three, you're doing great. If you see a number less, then you're not doing quite so great. But again, it kind of moves around. And so the definition is in our report. I don't need to go through all of that because that could take us an hour to go through the actual definition. But I think what we like is that LTV to CAC does - it measures the efficiency of spend required for a new customer against how much gross margin will be generated over that customer's lifetime. And that's a that's the whole point, right? You are you're trying to figure out - without having to burden it with the cost of everything else in the business, the cost of going and getting other customers, cost of retaining them, whatever it might be - you're looking at, you know, just the cost of what it takes to service that client, which in a SaaS world obviously is not all that expensive. And so a three to one type of, type of - look, it takes a lot of things into account. It hits your churn because LTV takes churn into account. So your kind of gross retention is built in that way, which kind of goes back to our previous comment on talking about somebody doing a freemium type of model. It's going to come into account here. And so in that way, it is - it's a pretty healthy metrics to go look at. I like that one. I also like CAC payback period, which just is a pretty simple way of looking at how long does it take you in terms of gross margin to make back the money that you just spent on gaining that customer. That one, best in class, across all kinds of profiles, tends to be about six months.

For one to ten million dollar ARR companies, we tend to look and say, hey, we want that to be sub twelve months. Now, if it takes you more than a year to pay that back, that's probably - you may - you may want to take a look at a few things. Obviously, though, it really depends on, are you bootstrapped? Are you majorly equity backed, majorly VC backed? That can make a drastic difference. And I encourage you to go take a look at the report to see some of the differences there.

And then finally, the one that I like the most is this thing called the SaaS magic number, which is your blended CAC. That also takes into account your retention and all of your kind of upsell and everything in there. It's just your ARR kind of uplift over the last - call it last period, last quarter or so over top of your entire sales and marketing spend. That number you want to see that being probably close to one. If you can so help it.

And obviously the higher the better there, but truthfully, most people are a little bit below one these days It's expensive to go grow your ARR, especially as growth rates have kind of been coming down. I've probably got a few more but I'll stop there for a moment

Shiv: Yeah, no, that's a great place to actually jump in with a question is when you look at your LTV to CAC and that three to one number, I'm noticing in the benchmark report that most of the companies that you benchmark are closer to two and even some in some cases lower than two. So can you just address that?

Kevin: Yeah, a lot of that's been the shift in the market in the last year. So I actually - directly below that, I put what it was in 2022 versus what it what it's been the last the trailing 12 months. And again, the trailing 12 months in that case was basically the first half of 2023 and the second half of 22, which is exactly when the market shifted. And it's drastic. You can tell that the twenty two numbers were well above three, which is the full kind of year of twenty two. So it speaks to the massive difference between the first half and the second half of 22 and how things have gone since then. But it just speaks to how much the buying cycles have changed in the SaaS world. I think anybody who's listening has certainly felt it, even regardless of whether or not you've heard about it. And so it has been drastic. We've watched sales cycles lengthen significantly. So how are you taking that into account with your expenses? Most people got used to a certain way of things during the pandemic years, during - you know, maybe even a couple of the years before that, where you could get used to, hey, whatever the sales cycle length is, which I think we've got a slide in here about that too. But you know, where maybe it's six to nine months in your industry. Well, if you are six to nine months, it's now at least 12 to 15 months, if not more. And so in that way, the first thing that gets hit here is your efficiency. You've probably been spending the same amount of resources on now growing likely less and possibly getting hit with worse churn. And so we've watched LTV to CAC come down across the board.

Shiv: Mm-hmm, mm-hmm, got it. And when you look at your CAC payback period, like one of the things that we see in the clients that we work with and the companies that we serve is you mentioned this idea that best in class tends to be closer to six months. What we find is that a lot of companies are underspending on their go-to-market, even though they have good net retention numbers, maybe their LTV to CAC ratio is in a healthy place, even just lifetime value overall might be five to 10 years in some cases, but they're just not spending enough on the go-to-market side. And so their CAC payback period is sometimes three months or six months, which can seem like best in class, but it's more of a function of the fact that they haven't been more aggressive with their spend, even though they know they can make that money back over a three to five year period and actually have a faster growing business. So just wondering what your thoughts are on that.

Kevin: Yeah, I'm sure you and I think very similarly here, which is probably the biggest message here is: go to market is a very patient game. If you're going to go try new channels, if you're going to go try to really go to outbound, go to market in a real way, use the channels that are out there. It is going to be expensive and it's going to be - it's going to make your metrics seem worse for a little while. There's going to have to be an investment. You're going to have to get comfortable sleeping at night, knowing that these are not going to the results are not going to show up tomorrow.

Most of the time, very efficient, especially kind of bootstrapped SaaS founders are used to the idea that they're getting referrals. They're getting it all inbound. And so they're getting it from a previous customer. Well, you're going to continue to get those. And I promise you those will continue to still be the most efficient customers that you're going to get. They're still going to be the cheapest to go bring in because they're coming as a referral. But you cannot go grow at the rates that you want to go grow at, more than likely, without kind of branching out beyond that, which is going to require you to go into some paid channels, go out and do some trade shows, go and do some paid media. There's obviously infinite number of channels that you can go into on the partner side as well, but you're going to see different metrics within each one of those channels. It's important to track those and to look at those compared to each other. They're not all going to be perfect, right? You're gonna have a few that, hey, let's say six months is your average across the board in a best case scenario. I guarantee you one of your channels is at 15 months. One of your channels is at 12 and one of them is at two. And that's probably your referrals and inbound ones. You probably can't grow at the rates that you wanna go grow at just by depending on referrals. Those will eventually top out.

Kevin: That's right. I will say in that case though, if you are seeing yourself with great LTV to CAC metrics and just great efficiency metrics across the board, that may be a decent time to go fundraise right now and go find investors. That's what investors are getting down to the level of detail on. Maybe a few years ago they weren't, they were just looking at growth rates. Now they're looking at that level of detail. Can you prove out that you can efficiently go grow? So try out a couple of new channels ahead of going in fundraise and see if that continues to be true. And if you feel like those are decent, that's a great time to talk to some investors, right?

Shiv: Yeah, and coming back to the retention numbers, I think, you know, when especially - we work with a ton of companies that have enterprise deals, deal sizes, or even mid-market deal sizes, but just their solution is so mission critical that once they're in, their customer is not displacing them with an alternative or, or going back to Excel in some way. And so, it's just like a mismatch between the reality of, once you close, you actually have this customer for 10 years, but you're now not being aggressive enough to find more people inside your TAM. And that's right - just bringing the conversation back to net revenue retention, I think it’s a good one - because let's say you land a customer for 30,000 today, but you know over the next seven, eight years, you're going to retain 105% of their revenue. Well that account is only going to grow for you. And it's worth, you know, $300,000 plus over that eight year span to the company, you can actually spend potentially 50, 60,000 to acquire this person and do it without losing any sleep because you know that's how much they're kind of worth to you. So the more you really understand these numbers, the more aggressive you can actually be with your go-to market

Kevin: That's right. That's right. And certainly on the enterprise side, obviously, we used to live in a world where it felt like, you know, 115% net revenue retention was not crazy for enterprise sellers, enterprise software sellers. So it's - it - which makes a lot of sense. I think maybe that numbers come down slightly. I think the numbers that we found in the last kind of trailing 12 months or so were 105%, 107%. Those are good numbers to shoot for. But you're right. If you can show that, why not go spend a little bit more to go get the next one? Especially if you know your sweet spot that well.

Shiv: Right, right. And I think a lot of companies, by having these benchmarks and then looking at their own numbers, you can feel more comfortable being aggressive because being aggressive sometimes feels more risky, right? Like - and if you’re risk averse, especially with uncertain market conditions, people tend to err on the side of being more cautious than aggressive. So that's tricky. One question I had is, one of the benchmarks that you have is account executive quota versus OTE.And you said that the quota to OTE ratio should be five to one at least. And so talk a little bit about that and help me understand like why - because in general, the stat is that 50% of reps miss their quota. And so reps are missing their quota, obviously the company is gonna miss their overall sales projections. And so how do you bridge both sides of these conversations together?

Kevin: Yeah, I'll actually start by answering that with another metric that's a few, that's a little bit later in the report as well, which is quota capacity over assignment. And so that over assignment really just means over your target. We have seen pretty consistently that you're right, 50% of reps do miss their target. I think I've heard that forever and I'm not sure I've ever seen a metric to say otherwise.

But they don't miss it by 100%. It's not a binary thing. It's not an either zero or it's 100% or zero and a 200%. It just averages out. On average, we see across the board an implied 85-ish percent quota achievement rate. So that means you're not hitting 100%, but you're hitting 85% of your quota. And so to counter that, most companies look for 115% to 120% quota capacity.

So that means that if your target sales goal is $10 million, you want to have $12 million of fully ramped and fully productive quota on the floor. So that's one way to kind of account for the kind of miss of eventually a rep, one rep or two reps or however many it may be. 

The other side of it is, you talk about the quota to OTE side of the house. This is one of my favorites. I'm really glad you brought that up because it's so hard to know when the market is moving very, very quickly. Like it was in probably 2021. I'm sure everybody here remembers the - it was so hard to go get sales reps. They were just getting paid crazy amounts of money to move. And we encouraged our portfolio companies and basically anybody that we talked to, to try and have some type of rubric and some type of benchmark around why you are doing what you are doing. The reason being because eventually we know the world's going to come back down to earth. These things always go through cycles. So stay consistent with a number here. You can go and have a higher base salary if you need to go get somebody versus what a base salary is internally. We love having the same kind of variable across a different - or across the same role. So in an AE case, you know, maybe you're talking about 200K OTE and you may pay somebody, you know, 100K - I think in this case, we do say it's usually 50-50, right? So 100K and 100K base salary versus variable. And we like the idea of, hey, a five to one, which basically means, call it, the other - the inverse of that is, you know, 20% of your quota is in OTE. So in a 200k case, you're talking about a million dollars worth of quota. The lower this ratio goes, the presumably more expensive that your AE is getting. We also have the number for the RSMs of the world. In fact, I think we actually maybe didn't include it in the actual report. It's not that dissimilar. But you're talking about, here, the reason why you do this is, and we've seen this, you know, in the three to four type of range. And so you may be talking about, instead of a million dollar quote on the 200K case, you're talking about a, you know, 800K quota. That probably sounds about right. The difference there that we see is the difference between, are you including the first year services in that, or is that software subscription revenue only, right? In which case then it may be closer to - it may be a slightly lower quota, just depends on how you go do things. But the reason why you do that is it makes it really easy as your quotas go up or as you need to start paying more to people, you need to expect more out of them. And the reality is that makes it easy to go hire people into that. It keeps things fair. Cause the reality is, no offense to the salespeople listening, but salespeople are going to talk, right? They're going to talk to each other. They're all going to know what the other people make and you need to make sure it's consistent across the board, especially as you start scaling that team.

Shiv: Right. Yeah. And the five to one from what you're saying is more about the fact that there needs to be enough quota that they need to hit in order to make that sales rep as efficient as possible. And how do you factor in just, what - coming back to this point that you're saying about 83 to 86% quota achievement rate. If we're projecting 115 to 120 percent, we're getting to 83 to 86, there's still this gap and this delta between kind of where we want to get to and we actually get to overall. And this is why we see companies letting reps go more frequently than they like. VPs of sales have an average tenure of less than a year and a half. And so how do we bridge that? Because our answer to this question has always been that marketing and sales need to work more closely together. And that's a key part of this puzzle, but especially in the stage of one to 10 million, it's not only that, but it's also retaining those customers and increasing their lifetime value and cross-sell and upsell, or at least seed expansion, if you will, within those accounts to have more revenue from existing customers. So looking at it more holistically and not just like net new revenue that the sales rep is kind of accountable to so that we don't miss our overall targets.

Kevin: That's right. I mean, we've seen companies where they've got fantastic new sales track records. They're great at quota and they're but they're missing the net revenue retention side. That kind of goes back to what I was speaking to before of they're great at building new shiny objects that people like buying and then they don't stick around. So you're absolutely right in terms of the holistic approach. It's a bit of a cop out. And so I'm going to take it. Which is - the cop out is that it is holistic. It is everything. It's kind of all of these things. And a few being a little bit more important than others, more just in how easy it is to be able to find the leading indicators. That's the whole point of any of these. It's one of the reasons why we tell our companies, you're not going to hit all of these. Like these are not all realistic benchmarks for you. But what you need to do is be able to understand them and start to track them and have a consistent way of measuring them over time so that you can figure out how well you are doing compared to last month and last quarter and last year, not just against the entire market. When you go out and you want to go exit or you want to go, you know, think about your next fundraise. That's a bit more of a time to be able to be able to say, ‘Ooh, we're pretty close to the benchmark or we're different than the benchmark’, but there may be very, very good reasons why I've been part of a number of companies where it would never make sense for us to be able to talk about our, you know, ramp time in ADR or BDRs and AEs because we have a really, really strong marketing function that's going to make them more successful faster. So okay, we can go faster than that in terms of our ramp time and lots of examples like that. But I think the to your point about marketing and sales working more closely together, you're right. It's everything, including that. One of the things that we get into all the time, we talk about the revenue cycle, the idea of how are opportunities coming out of leads, turning into prospects, what are the conversion rates all along the funnel that eventually get it down to a win rate. And within that point then, what was the total sales cycle? It's everything, right? Which is a bit overwhelming for somebody to hear, but that's kind of where it has to go. What's great about it is that it can make sense.

And it will also really help you scale if you get to know those things faster and find investors and find advisors that know these things and have been through it before. They can help you build this relatively quickly. We do it, and - not to be a sales pitch for us at all - but you know, this is the stuff that we enjoy doing. And I know lots and lots of other investors and people that enjoy doing it as well.

Shiv: How much of this do you think has shifted in the last year to year and a half as the overall markets have shifted? Because a year and a half or two years ago, you could be way more aggressive. Your CAC payback periods could be more than two years and you wouldn't have to worry about necessarily net revenue retention the way you do now because you would - you were always filling the top of the funnel with way more people potentially than you were losing. How much of that has shifted? And just shifting gears on towards the conversation on financials, how much are things like profitability and gross margin becoming more important now in the current market environment?

Kevin: Yeah, again, slightly cop out answer of ‘everything's changed’. We have -, and we tried to call out in the report where we could as to where things have moved pretty significantly. And we don't have perfect data here, right? Everybody's report is slightly different from a, from a time perspective. So we tried to make it as apples to apples as we could, when we could. And in the cases where it didn't seem all that relevant, we just didn't talk about it.

But to that end, I think a few things have changed more than almost anything else. And I think you called them out pretty significantly. Net revenue retention has turned into almost the number. If you've got net revenue retention, but you don't necessarily have the growth, people are willing to overlook that right now, especially from a, you know, investing perspective, from an exit perspective, because it shows that you are solving a real problem for your customers and you're good at showing that ROI to them. That is - that has proven to be now the most important thing. The second one of those is within profitability. If you can show that you're doing that and you're doing it efficiently, again, even if you're not necessarily showing the top line overall growth, that can be okay. Also, if you're in a world where you are in a highly competitive spot where maybe you're not quite so mission critical and so people are kind of leaving and going back to something else, understanding why and is that likely to shift in the next, call it, six to 12 months. If it's not, you may be in some trouble. But if it is, then understanding that story, how it's going to change, why it's changing, what are some of the underlying metrics that will help you sell and create that narrative to anybody that needs to listen to it is really important. I think that's one of the things, at least as an investor, right, that we've struggled with is when we're talking to companies, they don't understand the why, why things have necessarily moved around.

They can come up with a few interesting reasons, but when I'm most impressed is when they're using the metrics like this to say, ‘Hey, we've been tracking this and we can see that things are starting to turn around because all of a sudden our, our sales cycles have lengthened. We don't know if that's going to come back down or not, but in return, or on the other side of that, we've increased our pipeline pretty significantly. We've found these channels that seem to work a little bit better. And even though the sales cycle is longer, we now are taking more shots on goal and therefore we think we'll be okay in the long run. Our win rate has kind of stayed the same or our win rate has gone up. It's just taking us longer.’ 

That's an okay story to go out and sell to somebody. But all those things show up in LTV to CAC. They show up in - they'll eventually show up all the way down to your bottom line within profitability. I think profitability right now comes more into play as you're talking about two things. Either, one: you're looking to potentially exit and you're looking for something, you know, the rule of 40 type of metric, which is your EBITDA percentage of revenue plus your ARR growth percentage year over year. If those two things are equal to 40 or higher, obviously you are golden. Right now, people aren't getting to rule of 40. But if you're really thinking about M&A, that's a big piece. If you're thinking about fundraising, I'd encourage you maybe to think a little bit more about your burn multiple, which is something that we kind of talk about a little bit later on. The idea behind it is, people seem to care a bit more right now about the idea of your amount of burn over top of your ARR uplift, how much your ARR is growing, is if that number is below kind of 3x, then you're in actually pretty decent shape right now. So you can still be burning and still get a lot of attention, but you need to be doing so in a slightly efficient way. Again, showing that number is coming down. Even if you were above three, right, if you were at four or five and then you're able to show that, hey, that number is now two X or we, you know, we're - we can show all these reasons as to why that number is going to be, you know, one and a half to two and a half X in 2024. That's what people want to see.

Shiv: And just for the audience, just to reiterate that, the point here being that if you're burning $1 of cash, or let's say $3 of cash, and that's allowing you to add an additional dollar in ARR, if you're below that, you're in a healthier place because you're able to add recurring revenue for the cost of burning that cash.

Kevin: That's right. That's right. And so that I feel like, again, sub 10 million or so of ARR, I think burn multiples a far more relevant metric to look at than rule of 40.

Shiv: Than rule of 40. But do you think though - like even at three to one, right? Like that's a significant amount of cash that's kind of evaporating from the business. Like if you're, let's say, a $2 million company, you raise $6 million now, you've got to turn that 6 million into 2 million of ARR and then raise again. Otherwise you kind of are running out of cash, right? So...

Kevin: Yeah

Shiv: What are your thoughts on that in terms of like trying to actually be profitable faster versus trying to necessarily grow faster?

Kevin: Yeah, let's be clear on the 3x thing. Any company that we're talking to, any of our portfolio companies, we are saying, hey, you need to be well below 3x. Preferably, you're sitting between probably one and 2x on the burn multiple. If you're sitting below that, wonderful, right. But again, it all depends on your situation. If you're in a, you know, nice capitalization situation, if you feel like it's time to go attack and you've got investors that believe that then that may be okay to go do a 3x for a little while. I agree with you though, in today's market, I wouldn't be burning at a 3x burn multiple. Yeah.

Shiv: Yeah, it's a little scary, right? Unless you're in like a winner-take-all market and there's a huge amount of time and you kind of have to move really fast to capture, you're opening up the company to a ton of risk because we've seen some really big companies go under in the last year just because they've run out of capital and because they were burning so much money.

Kevin: Right. And you could previously - in a few previous years, this is why rule of 40 sometimes doesn't help is they could burn 100%. But if they were growing at 140%, they were fine. And your burn multiple would show up as like, oh, my gosh, we're fine. We're actually under 1X. In that case, we're doing great. Those same companies are still burning 100. You know, 100%, but they are, you know, only growing. Most companies these days seem to only be growing at 30 or 40%. That was a great year for somebody in 2023. So all of a sudden now you're sitting with a much more difficult situation. So it can get, it can pile up very, very quickly. What I've encouraged everybody to do is to be smart about this and think about this for the next 12 to 18 months, very, very seriously, and think about if you need to change the way that you're acting today.

Shiv: Totally, yeah. And I think the main message that I think the audience can take away from this is that you kind of have to look at all of these numbers and then use your judgment to make the best possible call for your business where you're maximizing your cash runway and at the same time growing the business and at the same time trying to retain your customers. And that's the hard part of this whole thing, right? Where you can look at the benchmarks, but at some point you have to make a decision that's contextual to your particular business.

Kevin: Absolutely. I think that may be the best takeaway here, which I always try to kind of caution people on. These benchmarks are a really helpful way to find leading indicators of what's actually going on in your business. These are not a replacement for operating and executing on your business. They are just a helpful tool to go figure those things out. But you got to be able to know what they mean and why these things are moving around. And ultimately then, to your point, go and make a different decision that comes down to still very, very simple methodologies, which is, you got to be profitable or you got to - you got to figure out a way to be able to finance your way to growth.

Shiv: I think that's a great place to end the episode. So with that said, what we'll do is we'll take the benchmark report and include it in the show notes. But just for the audience, Kevin, how can they learn more about you and, and Jurassic Capital in particular?

Kevin: Yeah, absolutely. We're super happy to talk to basically anybody, especially in the region, kind of all over the place, too. We love - we love talking B2B software. We try to be as well connected as you can be. So we know lots and lots of folks, even if we're not necessarily the right fit. And if we are the right fit, wonderful. We'd like to get to know people over a longer period of time. As I mentioned, we're super active with our portfolio companies. So when we kind of find the right spot, we've already usually known them for well over a year in advance. So we tend not to be somebody who can move very, very quickly or want to move very quickly. But instead, we like to be people who are getting building relationships, vibing very early and over a period of time so that we can kind of make sure that everybody's on the same page. And again, if we're not the right fit, we'll make sure that we know somebody and find somebody who is. But again, I obviously love nerding out about this stuff so feel free to nerd out with me about it as well. And we'll make sure that you've got, you know, access to all the right kind of benchmarks for your business. And hopefully that can be helpful as leading indicators for you.

Shiv: Awesome. Yeah. So we'll be sure to link the website and your LinkedIn and any other ways to get in touch with you in the show notes as well. And with that said, Kevin, thanks for doing this. I thought this was super insightful, especially for founders that are looking at their businesses and thinking about how to navigate some turbulent times here. So appreciate you coming on and sharing your wisdom.

Kevin: Absolutely. Yeah. Shiv, thanks so much for having me on, man. I really appreciate it. And as you can tell, I'm really passionate and we're really passionate about B2B software. And so this is awesome to do. Love the work that you guys do and the podcast as well. So thanks for putting this on. I know it's super helpful.

Shiv: Yeah. Appreciate it. Thanks, Kevin.

Kevin: Alright, thanks.